Tag Archives: deficits

Summary: Here we have a wonderful example of the cacophony that takes the place of political debate in the New America, in this case about Social Security. It’s one of the simpler issues facing us: a moderately predictable and fully controllable stream of benefits vs. government revenue — mostly income taxes; some graduated (“income taxes”) and some flat (FICA tax on wage income). Our difficulty understanding it provides a dark omen of our ability to handle our larger problems. This post complements yesterday’s post about our difficulty seeing how the jobs picture has changed.

PAUL KRUGMAN: Is it a condition of any Republican support that you have to go for really terrible policies? Because raising the Medicare age is a terrible policy. It raises medical costs, it does very little to improve the budget. It introduces a lot of hardship. Means testing in Medicare is a better policy. I don’t particularly like it, but it’s a better policy. There are other things you can do, other ways you can cut. Even I don’t like the business about changing the price index for Social Security, but that’s not as bad … (CROSSTALK)

RON JOHNSON (R-WI): To say that the Republicans haven’t done anything is just false. The House has actually passed budgets. With bipartisan proposals to try and save Medicare. The Senate hasn’t passed a budget in over 4 years. Listen, unless we do something, these programs are going broke. It drives me nuts. When I hear people say that Social Security is solvent to the year 2035, it’s not. (CROSSTALK) In the next 20 years we’ll be $5.1 trillion more in debt than … (CROSSTALK)

STEPHANOPOULOS: Let me put a version to George Will’s question to you then. If the president went along with either means testing of Medicare beneficiaries, more far reaching, he’s done a little bit already, and also adjusting consumer pricing index for Social Security recipients, would you as a Senator be open to more revenues?

Summary: Today we have one example from the flow of comforting words about the government’s deficits. While pleasant reading, written by a knowledgeable expert, it does not withstand close scrutiny.

Government expert at work, keeping us warm.

One of the great oddities of history is why nations adopt policies that were so obviously doomed to failure, or even disaster. It’s a long list, from 17th C economist John Law’s managing the debt of France with the Mississippi Company (latter known as the Mississippi Bubble), to Japan declaring war on almost everybody. For good reason Barbara Tuchman named her greatest history book The March of Folly.

There are two constant elements of these stories. First, warnings from experts. Second, assurances that these obviously crazy policies this time would end well.

So it is with the US government debt. We have all heard the warnings. As the debt grows, so do the volume of those saying not to worry. The economists of the Keynesian mainstream provide one form of comfort (fix the deficit later). The economists of the Modern Monetary Theory school provide another form (debts don’t matter, until they cause inflation or a currency collapse). A third group provides a vague form of comfort. An example of this is “Another way to look at the national debt” by Zachary Karabell (President of River Twice Research), special to the Washington Post, 8 February 2013 — Opening:

Welcome to the next chapter of the endless debt debate. The release of a Congressional Budget Office report on the next 10 years of the U.S. economy ends a brief lull in Washington. As we return once again to our regularly scheduled program of “Crisis and Impasse,” let’s take a moment to consider the following heretical idea: We have no debt problem.

We have spent years demonizing debt, and now have an entire political movement dedicated to the proposition that government debt will destroy America as we know it unless something is done now!

Stand by for a debunking of fears about the debt! I feel better already. The next line starts the analysis:

Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency …

This is false. First, government debt (eg, 30 year Treasury bonds) are not currency in any meaningful sense. They vary in price (currency is the standard of measurement for asset prices, like bonds). More important, although the government can convert debt into currency by printing money (ie, monetization) the process is not automatic. It is a political decision to inflate away the value of the nation’s loans.

Summary: Part of our year-end national festivities should be looking at the deterioration of the Federal government’s finances. Especially since the resolution of the fiscal cliff follies shows that neither party in fact cares. There are few deficit fighters, mostly arsonists. As for spending our money, it’s burnt for political profit and private gain. Here we review the damage, put it in context, and consider an alternative.

Contents

Deficit = our love of spending + reluctance to pay

The alternative

More details: the debt, and our liabilities

Comparing us to our peers

For More Information

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(1) Deficit = our love of spending + reluctance to pay

One measure of the Federal deficit is the increase in the government’s public debt (ie, net debt — that not held by the social security trust funds). In 2012 the debt grew $1.1 trillion to $11.6 trillion (that’s our gross debt).

That’s a large number, but tells us little. More useful is to compare it to our national income: the deficit is aprox 7.2% of 2012’s GDP, the debt is 73% of GDP. Also important is the rate of growth: it grew by 11% in 2012.

See the numbers for yourself: the US Treasury website shows the Federal debt for everyday from 1993.

What did we get in return? Prosperity, one of the strongest economies among our peers. But like last winter’s snow, only an ephemeral gain. The failed hypersonic cruise missile, the insanely expensive F-22 and F-35 fighters, the massive domestic surveillance apparatus reading everybody’s email, the legions of domestic securities agencies busy entrapping dumb Arab-Americans, the vast flow of public funds into the maws of large corporations — and the wars. All these things comprise Federal spending beyond the baseline, funded by borrowing.

Summary: As we approach the fiscal cliff, economists of different schools offer radically different advice. Austrians and Chicago-ians warn about the consequences of anything other than a fast austerity. Keynesian economists suggest continued deficits until the economic growth (and especially unemployment) return to acceptable levels. And advocates of modern monetary theory (MMT) tell us not to worry; there are fiscal limits — but they’re of no immediate concern. Today guest author Ed Dolan puts the pleasing MMT perspective under the microscope.

This is the fourth in a series about modern monetary theory. Other posts are:

As negotiations over fiscal policy heat up, one thing nearly everyone agrees on is that U.S. fiscal policy should be sustainable. The trouble is, there are sharp disagreements about just what sustainability means. This post explores three different meanings of fiscal policy sustainability and explores their significance for current budget debates.

(2) Sustainability as solvency

The first, and simplest, meaning of sustainability makes it a synonym for solvency. The proposition that we do not have to worry about debts and deficits because the government can never “run out of money” has become a mantra among followers of Modern Monetary Theory (MMT). As L. Randall Wray puts it in his book Modern MoneyTheory, “When we say that [perpetual government sector deficits] are ‘sustainable’ we merely mean in the sense that sovereign government can continue to make all payments as they come due—including interest payments—no matter how big those payments become.”

Summary: Economics is one of the central sciences of our time, especially about one of the frontier subjects: the macroeconomic effect of debt. Yesterday’s post centered on a graph from Ed Dolan. Today we have a rebuttal by Prof William K. Black. There are few aspects of economic theory more important today.

He is a very conservative scholar as you can see from his blogs and his associations with George Mason University and Cato. Dolan’s piece includes the admission that our present deficit

is largely the product of the Recession and

during the recovery from the Great Recession fiscal stimulus acts as an “automatic stabilizer,” i.e., a “counter-cyclical” policy that speeds recovery and reduces the severity of the recession.

Europe and Chile as economic experiments

Note that the world has provided a “natural experiment.” The EU responded to the Great Recession with austerity, a pro-cyclical policy that makes the recession more severe and longer. Moreover, EU and ECB leaders’ mantra is “there is no alternative” (a phrase that should send warning chills up any veteran’s spine) — because nations that joined the Eurozone gave up their sovereign currency they no longer have the ability to adopt rational automatic stabilizers. More precisely, they crippled the effectiveness of their automatic stabilizers through the limitations of their “Stability and Growth Pact.”

Note that this has not prevented budget deficits from occurring but it has greatly reduced fiscal stimulus.

Summary: Our slow recovery, especially compared to Japan and Europe, has boosted America’s sense of exceptionality and general awesomeness. So our Presidential candidates speak of new foreign wars (lots of potential in Africa and the Middle East), new domestic programs, and tax cuts — plus vague assurances that the deficit can also be cut. Today we see the one graph that destroys those illusions.

Summary: The US economy is one of the strongest of the developed nations, which has allowed us to avoid reforming our decayed political system, our mad unprofitable empire, and our insane military spending. The cheering over today’s employment report — showing continued slow growth — reflects this optimism. It’s delusional, looking at the effect while ignoring the cause. A broader perspective shows a darker picture.

He looks quite natural!

US Public debt:

$5.1 trillion at the recession’s start in December 2007

$10.1 trillion one year ago

Now $11.3 trillion

So the Federal government has borrowed $6.2 trillion since the downturn began. It’s borrowed $1.2 trillion during the past year, over 8% of GDP. For comparison, a 3% deficit is high — and a 4% deficit is critical.